PRIIPS Risk Overview (SRI, MRM and CRM)

PRIIPs contain an overall risk indicator, the SRI (Summary Risk Indicator), which has a range of 1 [low risk] to 7 [high risk].

This indicator is a combination of the following, which are also separately disclosed:

A Market Risk Measure (MRM), which has a range of 1 [low risk] to 7 [high risk]); and
A Credit Risk Measure (CRM), which has a range of : 1 [low risk] to 6 [high risk]).

PRIIPs also disclose a narrative on Liquidity Risk, if relevant.

THE SRI

This SRI is assigned according to the combination of the CRM and the MRM classes, in accordance with the following table:

	MRM1	MRM2	MRM3	MRM4	MRM5	MRM6	MRM7
CRM1	1	2	3	4	5	6	7
CRM2	1	2	3	4	5	6	7
CRM3	3	3	3	4	5	6	7
CRM4	5	5	5	5	5	6	7
CRM5	5	5	5	5	5	6	7
CRM6	6	6	6	6	6	6	7

CREDIT RISK MEASURE

The method for calculating the MRM is set out in Delegated regulation 2017/653 at Annex II, Part 2.

A PRIIP is allocated to a credit risk measure (CRM) on a scale ranging from 1 (lowest) to 6 (highest).

The CRM aims to reflect the probability of defaults related to relevant payments to investors.

The calculations are complex.

There are three different processes that firms may need to use for the assessment of a CRM, depending on the requirements:

Direct (where applicable),
Look-through assessment (where applicable); or
Cascade (where both Direct and Look-through apply)

The calculations also follow a four step process of:

STEP 1	Calculate the Credit Risk
STEP 2	Map the Credit Risk to the unadjusted Credit Quality Step (CQS)
STEP 3	Calculate the adjusted Credit Quality Step (CQS) to reflect the maturity or the recommended holding period.
STEP 4	Convert the adjusted Credit Quality Steps to the CRM

DIRECT METHOD

PRIIPs will need to assess the CRM at the PRIIPs level (direct level) where:

They face material counterparty risk“ (Material” refers to a non-collateralized exposure on a counterparty, which accounts for 10% or more of the total assets/value of the fund)
They must make pre-determined payments to investors – when the return on the investment depends on the creditworthiness of manufacturer or the party bound to make the relevant payment to the investor.

If all payment obligations of an obligor or one or more indirect obligors are unconditionally and irrevocably guaranteed by another entity (the guarantor), the credit risk assessment of the guarantor can be used if it is more favourable than the credit risk assessment of the respective obligor or obligors.

As regards the direct method, a CRM of 1 is assigned where the assets of a PRIIP or appropriate collateral, or assets backing the payment obligation of the PRIIP, are:

At all times until maturity equivalent to the payment obligations of the PRIIP to its investors;
Held with a third party on a segregated account under equivalent terms and conditions as those laid down in the MiFID Directive; and
Not, under any circumstances, accessible to any other creditors of the manufacturer under applicable law.

Under Article 34, where the PRIIP is an Undertaking for Collective Investment in Transferable Securities (UCITS) or an Alternative Investment Fund (AIF), the UCITS or AIF itself shall be taken to entail no credit risk – hence the Direct Assessment is not required. However, the underlying investments or exposures of the UCITS or AIF shall be assessed using the look-through method, where necessary.

For more details on the CRM calculation, click on the below links:

LIQUIDITY RISK

Article 56 to 58 set out the criteria for determination of liquidity risk.

A PRIIP shall be considered as having a materially relevant liquidity risk where either of the following criteria are fulfilled:

The PRIIP is admitted to trading on a secondary market or alternative liquidity facility and there is no committed liquidity offered by market makers or the PRIIP manufacturer, so that the liquidity depends only on the availability of buyers and sellers on the secondary market or alternative liquidity facility, taking into account that regular trading of a product at one point in time does not guarantee the regular trading of the same product at any other point in time;
The average liquidity profile of the underlying investments is significantly lower than the regular reimbursement frequency for the PRIIP, when and to the extent liquidity offered by the PRIIP is conditional to the liquidation of its underlying assets;
The PRIIP manufacturer estimates that the retail investor may face significant difficulties in terms of time or costs for disinvesting during the life of the product, subject to specific market conditions.

A PRIIP shall be considered illiquid, whether contractually or not, if either of the following criteria are fulfilled:

The PRIIP is not admitted to trading on a secondary market, and no alternative liquidity facility is promoted by the PRIIP manufacturer or a third party, or the alternative liquidity facility is subject to significant limiting conditions, including significant early exit penalties or discretionary redemption prices, or where there is an absence of liquidity arrangements;
The PRIIP offers potential early exit or redemption possibilities prior to the applicable maturity, but these are subject to significant limiting conditions, including significant exist penalties or discretionary redemption prices, or to the prior consent and discretion of the PRIIP manufacturer;
The PRIIP does not offer potential early exit or redemption possibilities prior to the applicable maturity.

A PRIIP shall be considered liquid in all other cases.

THE SRI

THE MARKET RISK MEASURE (MRM)

CREDIT RISK MEASURE

LIQUIDITY RISK